Hurricane Katrina And The Impact On Real Estate Prices

In the wake of Hurricane Katrina's wide path of destruction, the real estate market will be affected perhaps in ways not fully understood or expected. If recent hurricane recovery history holds true there will be several good things to come out of all destruction. Let's hope so as those who live in the Delta region have suffered immensely.

In September 1989, a strong category 4 hurricane by the name of Hugo made landfall in the Charleston, SC area. Up to that time it was the strongest hurricane to hit the U.S. mainland since Camille whacked the Gulf coast in 1969. The damage from Hugo was extensive with entire forests wiped out and fishing villages and seaside resorts heavily damaged. Dire predictions of the storm's negative effect on the local economy were made. I know, because I was living in the nearby town of Goose Creek when Hugo roared through; I witnessed a sustained and lengthy recovery effort for many months thereafter.

These were some of my personal observations of that hurricane's impact on the housing market:

1. Housing stock destroyed. Yes, the number of mobile homes, apartments, and single family homes damaged or destroyed by Hugo was large. What had been a fairly open pre-hurricane housing market quickly tightened up as the vacancy rate plunged to near zero as all available, undamaged property was suddenly snapped up. Rental rates, which had been on the low side, suddenly shot up and stayed up even as the housing stock was replenished over the next year. The net effect of Hugo was that older, substandard housing was replaced by more modern housing built with the latest building code requirements included. Rental rates rose accordingly to reflect the improvements.

2. Insurance payments. Although the property I was living in did not sustain much damage, some of the homes in our neighborhood did. Within days of the storm's wake insurance agents were canvassing neighborhoods, filing claims, and issuing checks on the spot. The quick move of the insurers allowed people to run out and make needed repairs quickly. Oftentimes, the amount of the check more than covered actual damage thereby allowing homeowners to make both structural and aesthetic improvements to their properties. These improvements were credited with fueling the subsequent surge in local home prices.

3. Government assistance. FEMA cut its teeth on Hugo. Originally, much criticism was levied FEMA's way because of the agency's slow response to the disaster. It took several more disasters after Hugo before FEMA's response time improved. Still, where private insurance companies left off, FEMA stepped in by cutting checks that allowed people to rebuild. Essentially, FEMA stepped in to help the uninsured or under insured recover. Plenty of homes that had been substandard before Hugo were replaced by homes that met current [and stricter] housing codes. The impact on the housing market was felt as this rising tide of support effectively lifted housing prices.

Every particular storm's impact on a local economy is different. Unfortunately for residents in the Delta region, Katrina blew through after a particularly rough hurricane year in 2004. No, FEMA isn't broke but the financial stress on insurance providers cannot yet be measured. Unlike with Hugo, where the recovery effort started immediately after the storm left, the Delta region is still in rescue mode and waiting for the waters to recede. I fully expect that it'll be weeks before any sustained recovery effort can be launched and even then it will be a long, drawn out process as insurance claims are filed, local building codes are re-examined, and the most important part - people - decide whether they want to rebuild in damaged communities or move away.

South Florida recovered fairly quickly after Hurricane Andrew devastated Homestead in 1992, but many central and panhandle communities in Florida are still reeling one year after a series of hurricanes tore up their homes in 2004. Again, much will depend on individual families willingness to rebuild and that is the untold story lying in the wake of Hurricane Katrina.

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